Surety Bonds Insurance If you’ve ever been part of a project, whether as a customer, as a supplier, or as a service provider, you’ve probably heard of Surety Bonds, right? Even in other situations involving service contracts, this insurance can be cited frequently. Surety Bonds, or in good Portuguese, surety bond, is a financial guarantee that the covered party will fulfill its contractual obligations.
There are three parties involved in a bond:
- The main one is the part that is covered and that is obliged to comply with the terms.
- The creditor (obligee) is the party requesting the guarantee.
- The surety is the party issuing the bond.
There are surety bonds for different types of industries, services, and professionals. In any case, if the principal does not fulfill the contract, the creditor can trigger the insurance and the guarantor will be obliged to pay to cover the losses.
Surety Bonds for Construction Companies
A construction bond is a type of bond used by contractors for a construction project from the simplest to the most elaborate. Surety Bonds Insurance is used as a guarantee that different aspects of construction projects are paid for and fulfilled by all parties.
Approximately two-thirds of all insurance bonds issued are issued to construction companies. There are several types of surety bonds applicable to the construction industry. These typically include:
- Contract Bonds, also called construction bonds, guarantee that the work will be completed by the terms of the contract. If the contractor fails to complete the work on time, according to specifications, or leaves the work unfinished, you can file a claim to cover your loss.
- In the construction industry, contractors bid for construction contracts. Project owners generally require contractors to enter into a bid guarantee before accepting the bid and awarding the contract. Bid Bonds assure that the principal can guarantee the fulfillment of specific requirements contained in the offering. They are commonly paired with performance bonds that guarantee the completion of a project.
- Payments Bonds plus Performance Bonds are required by federal law. The Miller Act requires contractors responsible for the construction, alteration, or repair of federal buildings to provide a payment bond for contracts over $100,000. These bonds ensure that all subcontractors for the project are properly paid. If they do not receive their payments as per the contract, the escrow will refund them. In most cases, the contractor will then be required to refund the security deposit.
- Performance Bonds guarantee that the contractor will complete the project by the terms of the contract. These bonds protect the contractor from the risk of a poorly performed service. If the work is abandoned before completion, if it delivers something unsatisfactory or late, the title may be responsible for completing the contract, hiring a replacement contractor, or compensating the project owner.
- Maintenance Bonds, maintenance guarantee bonds, cover materials and labor for a period of up to two years after construction is complete.
- Supply Bonds are the guarantee that a supplier will deliver the promised materials for the construction project.
Many professionals may be required to have very specific types of Surety Bonds and guarantees, such as car dealership bonds or contractors’ licenses.
Why does a company need to have Surety Bonds insurance?
Surety Bonds serve as a guarantee, that is, they give the feeling of security that is often what is missing for someone to close a contract with a company. If you’ve just started providing services, if your company still doesn’t have many contacts or customers to give good references, Surety Bonds are a good way to start gaining credibility.
Additionally, there are federal and state requirements that require Surety Bonds for different industries. Licensing and permitting titles are designed to assure the client that you will perform your work ethically and by the rules of your profession.
But as you may already know, each state legislates independently, which means that the requirements can be different depending on where you are and of course, the profession you practice. Check the laws before asking for a license and especially before starting to act.